Eurozone inflation slowed to 1.7% in January, below the European Central Bank’s (ECB) target of 2%, thanks to lower energy costs and a stronger euro.
The forecast for full-year inflation was in line with economists polled by Reuters and below the 2% figure recorded in December.
Core inflation, which excludes the more volatile prices of energy, food, alcohol and tobacco, fell 0.1 percentage point to 2.2%, the lowest level since October 2021 and the lowest in four years, Eurostat said on Wednesday. That was down from 2.3% in the year to December, preliminary figures showed.
Looking at the main components of euro area inflation, the highest annual rate in January is expected to be in services (3.2%, 3.4% in December), followed by food, alcohol and tobacco (2.7%, 2.5% in December), non-energy industrial goods (0.4%, 0.3% in December) and energy (-4.1%, -1.9% in December).
This comes as the ECB is expected to keep interest rates unchanged at 2% for the fifth consecutive time at its first meeting of the year on Thursday.
“The combination of lower inflation in January and a stronger euro at the start of the year is likely to provide some ammunition for the Governing Council’s dovish side,” said Diego Iscaro, head of European economics at S&P Global Market Intelligence.
“We think the most likely outcome is for the ECB to keep interest rates on hold for now, given that underlying inflation is still a little too high for comfort and given expectations that the eurozone economy will regain momentum before the end of the year.”
Economists expect ECB inflation to average 1.9% in 2026, after hovering at 2.1% last year, and are expected to remain unchanged in the coming months.
Paul Hollingsworth, head of DM economics at BNP Paribas Markets 360, said the bar for policy action this year was high.
“We see high hurdles for any policy action, and stronger-than-expected underlying price pressures suggest that the ECB supports a long-term stability policy,” he said in emailed comments last week.
“We continue to see rate hikes in the third quarter of 2027 as the next move. By then, we expect to see further evidence of increasing domestic price pressures from increased defense and infrastructure spending,” he said.
